Keeping cash flow healthy is crucial in tough times

Friday

Dec 26, 2008 at 6:00 PMJan 1, 2009 at 12:00 AM

With the recession bearing down hard on small businesses, relying on steady payments to maintain your company's healthy cash flow is no longer wise. Instead, experts advise staying ahead of the tougher curves and trends, knowing your cash flow at least 13-weeks out, and exploring new strategies like offering incentives for early payments.

With the recession bearing down hard on small businesses, relying on steady payments to maintain your company's healthy cash flow is no longer wise. Instead, experts advise staying ahead of the tougher curves and trends, knowing your cash flow at least 13-weeks out, and exploring new strategies like offering incentives for early payments.

Melinda Ailes, senior management counselor for the Massachusetts Small Business Development Center said businesses need to stay on top of their cash flow, offer incentives for early payments as long as they keep tabs on them, watch out for even the smallest of trends and learn to adjust their own expenses accordingly.

"If your customers are experiencing difficulties, it will spread throughout the supply chain. If they are getting slower payments, their payments will slow down. You really need to have a good hold of your own cash flow cycle," said Ailes.

But how to keep that cash flow healthy during a recession?

"It is important for each business to do a cash flow forecast. Typically the span of time is 13 weeks. How much does the business need over the next 13 weeks and where will the incoming cash come from," said Ailes. "This allows the business to take action before it's a crisis. You should also be reviewing that cash flow each week and adjusting expenses as necessary."

Asked if businesses should prepare to have more of a cash reserve now, Ailes said it would be difficult to do so if a company's receipts and payments are tight.

In order to speed up receivables, Ailes said businesses should learn to invoice more quickly, stay on top of them, call immediately if they are late with a payment and agree to schedule payments rather than waiting for a payment in full at some future date that may never come.

Warwick, R.I.-based consultant Mark S. Deion of Deion Associates & Strategies Inc. said when it comes to focusing on payables and receivables, businesses must think of those companies that are most critical to the welfare and longevity of the business.

"You need to identify the critical vendors that you cannot live without and give them the preferential treatment like payment incentives. It's silly to spend time on a few businesses that make up 10 percent of your business when there are others that make up 90 percent," said Deion.

But that doesn't mean there shouldn't be concerned when a minimal trend occurs.

According to Deion, when businesses who always pay on time start paying late, the company should be picking up the phone to talk to them. Sometimes companies will wait to reach out until it is way too late, he said.

"People tend to not communicate initially, preferring to cross their fingers and hope for the best. But when nothing happens and that company files Chapter 11, that's your loss," Deion said. "You must maintain an open a line of communication right away when a trend occurs... Arbitrarily continuing to ship them product will not do you any good."

One suggestion Deion made is for like businesses to consider buying products in bulk so that they can cut down on their own back stock and save money at the same time.

"Get these little coffee shops, bakeries or other small businesses together to purchase these products each month so that each business pays out less and stocks less," said Deion. "Sure, these are businesses that may be competitive to some degree but it's about getting the product for less money, which won't do any damage to anyone and will help them compete with the big boys."

As for offering incentives to increase the timeliness of payments, Deion said while it's a good idea, the businesses need to make sure they calculate the incentives and their profit levels. "If your profit margin is 10 percent then it would make no sense to offer 10 percent savings if a payment is made early. You need to know how much the cost of your receivables are in order to know what kind of discount you can provide," he said.

When it comes time to cut off a business, Deion said businesses who have kept in communication with these companies will know what's going on better than the companies that kept sending product hoping for a turnaround and payment.

In a do-unto-others world, Deion noted that businesses attempting to slow down payments to their own vendors should read some of the above advice. If these vendors are watching their accounts closely-which they now should be, businesses could find it harder to get the product that they can't live without in the first place.

"These vendors should be looking for trends as well," Deion said. "You can be creative with your vendors, but don't slow down the payments. Keep the communication open."